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The new deal.


A perception that the bottoming out the commercial real estate market is has given birth to a rise in leasing sales activity in the New York The deals being made today, are completely different from years ago and even two years ago.

In lease negotiations, leverage is on the side of ever-sawy tenants, and brokers, representing owners and users, are finding they must adapt and respond to corporate America's changing needs and concerns. Meanwhile, ownership, increasingly institutional, has abandoned "gut" decisions for in-depth analysis and financial certainty.

In the sales arena where financing is scarce, cash is king and there are fearer deeper-pocketed players in the game. A significant number of users are finding low prices make it more cost-effective to buy than rent.

REW discussed the changes in deal making with the brokers that design today's transactions.

Tenants Smarter

While many report that owners are sacrificing less in the way of financial concessions in recent months, tenants, for the most part, continue to occupy the driver's seat. Aside from monetary allowances, tenants, coached by skillful brokers, are demanding more in the way of disclosure and flexibility. Tenants want to understand everything, brokers say, and that makes each deal take longer to complete.

"They've turned the negotiation process into a process that satisfies their needs and requirements," said Jim Frederick, partner, Abrams Benisch Riker.

At lease negotiation sessions, Frederick said, a large number of chairs are filled by various consultants representing the tenant.

The sophistication of tenants in the leasing process seems to be a result of the shift in how corporate America views real estate. The financial impact of a company's real estate holdings is no longer taken for granted.

Companies want brokers that can help them with a game plan that is balance sheet oriented, said Bruce Mosler, vice chair, Galbreath Riverbank.

"Companies are in the process of 'rightsizing' and understanding the impact it can have on their balance sheet," he said.

Robert L. Freedman, vice chairman of the board, Williams Real Estate, said there has been a near "populist revolution." Tenants are more aware of the elements of the lease, and more selective in terms of the service and skill they receive from their brokers. Brokers, he said, must be more knowledgeable about buildings and have greater interdisciplinary support. As a result, Freedman said, the broker has had to elevate his role to that of an advisor or consultant.

With greater emphasis being placed on the expense side of the business, top-level executives are now representing their companies in the lease negotiation, said Brad Berger, executive vice president, Robert Martin Company, an owner and developer in Westchester County. Thus, he said, they are more discerning consumers.

Rather than allowing multiple brokers to show them the various options in the market as was common in the 80's, more tenants are engaging a single consultant, notes Mitchell S. Steir, a senior managing director at Julien J. Studley, Inc., which represents only tenants in New York. Many tenants are currently not happy with the deals they made in the 80's, he said.

"Not only is their rent a heckuva lot different than they thought it would be," Steir said. "but some of the other clauses have come back to haunt them."

So the sophistication of tenants, Steir believes, is due in large part to the knowledge the broker brings to the process, and in turn, imparts to the tenant.

Wish List Gets Longer

Tenants are mandating that their leases include more protection on a greater number of issues.

In addition to non-disturbance clauses, which are becoming standard, some tenants insist on specifications regarding operational issues like the quality of the air-conditioning, said Franklin C. Speyer, senior director, Cushman & Wakefield.

"Now [these clauses] are considered so basic to the deal and, if they are not included early on in the deal, [the tenants] will break off negotiations," Speyer said.

Most owners, Speyer said, are still feeling the effects of the economy and the market and, therefore, must be open to what tenants ask for.

"[They] have got to play ball," he said. "it's that or close the building."

Today, tenants of substantial size make RFP (requests for proposal) to a particular landlord rather than submitting a proposal.

This is an example of the market legislating the process, said Freedman. "The roles have been redefined somewhat," he said.

William T. Cohen, executive vice president, Newmark Real F-state Services, said this trend is disconcerting to some owner representatives because sometimes they will receive the RFP before the tenant has inspected the building. As a result, he said, some buildings are opting not to publish the asking price for space.

Tenants also want sublease clauses that give them more freedom. And, of course, there is price. Owners who believe they have brought down rental rates enough to compete in the market are asked by tenants to go even lower.

"They haven't taken into account we've lowered prices," said Stefan Ensler, vice president of Leasing, the Anderson Organization. "... yes, there are some pretty aggressive deals out there, but when you are at a 'teens' deal that's pretty aggressive in itself."

Some owners say they see a greater sense of urgency on the part of tenants and that high concession packages do not seem to be getting any higher.

"I believe there is a sense now we are at the bottom," said Cid Keller, president of Promenade Realty, an owner in the Plaza District.

New Emphasis on Finances

Brokers are finding that being a player in the 90's means combining market knowledge with a host of other skills, like financial analysis. Each deal demands an understanding of a deal's financial impact for both owner and tenant as well as the financial soundness of both parties.

"In the 80's, I can't remember a deal where acceptability to a lender was critical," said Mary Ann Tighe, executive managing director, Edward S. Gordon Company Inc.

In a recent re-negotiation on behalf of a tenant, Tighe said, 40 percent of the energy went into the financing aspects. The advertising firm of Griffin Bacal Inc. wanted to restructure its 66'000square-foot lease at 130 Fifth Avenue, on which there are a first and second mortgage. Since the deal would change the cash-flow structure of the building, the lender approval was required.

"You have to construct the entire

In addition, she said, full disclosure of how a building is financed is now a standard requirement by tenants and owners are scrutinizing security deposits more than ever before.

Flexible Owners

Eager to attract and maintain existing tenants, property owners are being flexible and responding with their own creativity.

Tenants seeking to lock in today's more favorable lease terms, for example, are finding a willingness on the part of owners to negotiate renewals early.

"Owners in their anxiety and effort to keep existing quality tenants are willing to recast early and renew early recognizing tenants, brokers and consultants," said Marc G. Schauer, executive director of Leasing, Sylvan Lawrence Company.

Landlords realize, he said, that if they are "too tough" they will pay later with free rents and installations for a new tenant.

And, while mid-sized and smaller tenants, previously renegotiated directly with the landlord, Schauer said, landlords will now pay tenant consultants in the recasting process if they are on an exclusive arrangement or they have been hired by the tenant.

Schauer's firm recently acted as advisor to a tenant who had some time to go on its 25,000-square-foot lease in downtown Manhattan. In the end, they negotiated a new 10-year lease for the' tenant in another space in the building.

More and more, said Farley, executive vice president, SL Green, a tenant prospect will ask his firm to take over the lease in their current location. A tenant occupying 6,000 square feet at $35 a square foot, he said, may want to cash in on lower market rents by expanding into 10,000 square feet at $20 a square foot. The dollar amount of the existing lease would be amortized over the life of the new lease.

"There are situations where we'll pursue it and there are situations where their commitments are so significant that it doesn't make economic sense," he said.

Many owners are pre-building space. Farley of SL Green said this helps his firm compete with the sublease market, which offers tenants the opportunity for immediate occupancy.

At Carnegie Hall Tower, Cohen said, they pre-build space to fit a certain 'genre' of tenant like a law firm, for example. When a lease is signed, he said, they need make only minor changes before move-in can take place.

Owners Changing

Meanwhile, brokers who represent owners have found their clients experiencing an evolution as well. Institutions are taking possession of and purchasing more real estate today and they have instilled their academic approach to deal making.

"Institutional control of property in New York City has added a higher professionalism and a totally analytical approach to the game," said Peter Riguardi, executive vice president, Koeppel Tener Rignardi.

These institutions have also brought to the process the extensive hierarchies that are not found with entrepreneurial owners.

"There are so many people that need to have their stamp of approval before a deal can be made," said Frederick.

Retail Tenants Also Enjoying Clout

On the retail front, tenants also seem to be maintaining the upper hand.

Ed Friedman, president of Newmark Retail Services, said tenants are acquiring longer leases and more favorable terms. "Right to recapture" clauses are rare in new contracts and there are. now broader use and sublet clauses.

"The fact of the matter is it's a whole different negotiation, he said.

Landlords, Freidman said, are a lot more open-minded today in regard to who they will accept as tenants.

According to Ben Fox, executive vice president, New Spectrum Realty Services, Inc., due to market conditions and the emergence of up-scale, design-conscious establishments with limited menus, food establishments are no longer a "liability" for Class-A office buildings.

But others see a firming of prices and groups of tenants competing for the same space.

"The landlords are being much more specific about their requirements," said Faith Consolo, senior vice president, Garrick Aug Store Leasing Associates.

She believes retail is ready for a turnaround due to the healthy holiday season retailers experienced and the increased interest from national tenants.

Equity Key to Sales

In the commercial sales market, the lack of conventional financing has made equity and the lucky holders of it reign.

"The rare buyers you find that can bring all cash expect to, and probably deserve to, drive a hard bargain," said Darcy Stacom, senior director, Financial Services Group, Cushman & Wakefield.

A buyer who presents all cash, she said, usually finds 10 to 15 percent taken off the otherwise financed sales price.

Brokers are arranging for seller financing or finding other sources of supplemental financing. Therefore, Stacom said, brokers find themselves negotiating a sales contract and a loan document.

"If you weren't doing financing before ... if means you have to go out and find out how to negotiate a loan document," she said.

The struggle for equity has created a completely different group of key purchasers, according to Peter Hauspurg, principal, Eastern Consolidated Properties, Inc. These now include: Institutions, corporations, insurance companies, a handful of developers that did not over-leverage themselves in the 80's, and some new investors trying to capitalize on low prices. These new kids on the block, however, soon find that they will need at least 50 percent equity to get in the game, Hauspurg said.

"The deals we bring are so safe," said Hauspurg. "It's very hard for people to walk away from a $5 million equity contribution."

Brokers, he said, are now geared up to deal with banks and the increased reporting they require. They must also, he said, adapt themselves to the way corporations buy.

Users Enter Sales Market

Many of today's purchasers are users, businesses that are finding sales opportunities too good to pass up.

"What it used to cost to occupy they can buy buildings for," said Scott Latham, vice president, Eastern Consolidated Properties, Inc.

Recent user-based transactions in Midtown Manhattan have included: The purchase of 320 Park Avenue to Mutual of America, Bertelsmann purchase of 1540 Broadway, the purchase of 1270 Broadway to a Korean-based company, and the purchase of the Ed Sullivan Theater by CBS.

Others are taking advantage of creative arrangements like the commercial condominiums. The user occupies space for less than he would pay in a lease and the owner achieves a better value for his property. The Girl Scouts of America kicked off this trend in Manhattan when they purchased a significant portion of 420 Fifth Avenue. Other non-profits, as well as corporations, have also become space owners in recent months.

In downtown Manhattan, Latham said, properties are attracting greater attention from investors.

In a recent deal, Eastern negotiated the sale of 116 Nassau Street to a partnership formed by investor Arthur Shapolsky and a user.

Also prevalent today are tri-party agreements between buyer, seller, and lenders, said Brian Ezratty, senior vice president, Eastern Consolidated. The recent sale of the Ed Sullivan Theater to CBS by First Winthrop required the consent of Sanwa Bank.

There are also many foreign buyers eager to enter the New York market and anxious to take advantage of low prices.

"There's a tremendous demand for investors from all over the world who are seeking to buy property in New York," said Earle Altman, senior vice president, Helmsley Spear.

But, while investors perceive there is an "opportunity to buy on a sound economic basis," few have been able to make a hit, said Altman, because sellers are still haunted by the tax consequences. Since they will have to pay a large percentage of the profit to the government, he said, they are holding out for a price that makes it worth their while.
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Title Annotation:Commercial Sales & Leasing; lease negotiations favor side of tenant in current real estate market
Author:Fitzgerald, Therese
Publication:Real Estate Weekly
Date:Mar 24, 1993
Previous Article:Walter & Samuels manages for banks.
Next Article:For sales: 1993 year of opportunity.

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